Calmer Tone in Markets

May 26, 2010

Financial markets have reverted today to their Jekyll side after yesterday’s Hyde performance. The dollar is narrowly mixed, with gains of 0.2% against the euro and 0.1% against the yen but losses of 0.4% against the Australian dollar, 0.3% relative to the Swiss franc, 0.2% versus the kiwi and 0.1% against the Canadian dollar and sterling. Anxiety appears to have lessened over Spanish banks and Korean geopolitics.

Stocks recovered 7.3% in Indonesia, 2.3% in India, 1.7% in Singapore, 1.4% in South Korea, 1.1% in Hong Kong, Taiwan and Thailand, and 0.7% in Japan. In Europe, stocks have advanced 2.4% in France, 1.8% in Spain and 1.6% in Germany and Britain.

Ten-year bond yields rebounded 6 basis points and 5 bps in Germany and Britain, and the 10-year JGB edged up one basis point.

Commodities bounced as well, with oil up 2.5% at $70.45 per barrel and gold rising 1.2% to $1212.50 per ounce.

Speaking at a BOJ-sponsored conference in Japan, Fed Chairman Bernanke underscored the need for independent monetary policy and defended “around 2%” as a credible inflation goal for all central banks to pursue. Bank of Japan Governor Shirakawa said price stability is one element of the more important objective of maintaining the stability of the financial system. Minutes from the BOJ’s end-April meeting expressed caution about over-doing monetary stimulus.

Professor Robert Mundell of Columbia, a pioneering authority on optimum currency areas, believes the euro area will eventually require debt restructuring by one or two members. Two members of the ECB Governing Council voiced optimism about fiscal deficit reduction plans. Continuing U.S.-Sino talks dwelt on geopolitical issues rather than yuan policy. Secretary of State Clinton called America’s commitment to defending South Korea rock solid.

The Organization of Economic Cooperation and Development released semi-annual growth forecasts for 2010 and 2011 that are more upbeat than the last ones. Projected world and OECD-30 growth rates for this year are 4.6% and 2.7%. 3.2% is penciled in for the United States in both years. Growth in the euro area is put at 1.2% in 2010 and 1.8% next year. Japanese growth of 3.0% in 2010 settles back to 2.0% in 2011. British growth accelerates from 1.3% in 2010 to 2.5% in 2011. Among key non-OECD economies, Chinese GDP is likely to expand this year by more than 11%, and the rates in India and Brazil are assumed to be 8.3% and 6.5%. These forecasts of decent economic growth help alleviate worries about sovereign debt problems.

Japanese corporate service prices slid 0.4% last month and by 1.1% from April 2009. The Shoko Chukin index of small business sentiment in Japan edged down just a tenth to 46.7 in May from a 29-month high of 46.8 in April. The index averaged 43.1 in the first quarter, 42.3 in 4Q09 and 42.1 in 3Q09.

According to the French statistical agency, INSEE, business sector confidence firmed to 97 in May from 96 in April, while sentiment in all sectors stayed at 96. Real household spending in France fell 1.2% in April, but the reading for March was revised upward to +1.6% from +1.2% reported initially.

British mortgage loans of 35.7K in April according to BBA data fell slightly short of expectations.

German consumer confidence slid back to 3.5 in June, and May’s reading was revised to 3.7 from 3.8.

Industrial production in Singapore accelerated to on-year growth of 51.0% from 46.6% in the prior month. The Thai trade balance swung to a $266 million deficit in April from a $1.155 billion surplus in March. Exports were 35.2% greater than in April 2009. The Filipino trade gap was $362 million in March, 8.7% wider than the month before. South Korean consumer confidence improved a point to 111 in May despite tensions with North Korea.

Australia’s index of leading economic indicators improved to 0.9% in March from 0.5% in February. South African consumer price inflation receded further to an on-year advance of 4.8% in April from 5.1% in March, 5.7% in February, and 6.2% in January.

Sweden’s trade surplus in April of SEK 6.9 billion was down from SEK 7.6 billion in March and SEK 7.9 billion a year earlier. The January-April surplus was 23.7% smaller than a year earlier. Polish retail sales were 1.6% lower in April than a year earlier but had posted an 8.7% increase in the year to March. The Berlusconi government in Italy approved EUR 24 billion of spending cuts.

Currency Thoughts has evolved from a blog to a full-functioning website. This new design provides easier access to your favorite features and new capabilities to accept ads. In the future, it will be possible to register to accept emailed updates.